Consider a small open economy. An increase in investment demand implies a) an in
ID: 1103688 • Letter: C
Question
Consider a small open economy. An increase in investment demand implies
a) an increase in the trade balance, a fall in net capital outflow, and a rise in the real exchange rate
b) a fall in the trade balance, a fall in net capital outflow, and an increase in the real exchange rate
c) a fall in the trade balance, a fall in net capital outflow, and a fall in the real exchange rate
d) an increase in the trade balance, an increase in net capital outflow, and a rise in the real exchange rate e) None of the above
Please explain why
Explanation / Answer
Ans is B
Investment increase will imcrease national income and thus increases imports and trade balance decreases or worsens.
Inveatment increases decreases interest rate and thus decreases capital inflow amd increases capital outflow and there will be an imcrease in real exchange rate